Oil Wells[Clarification: Information regarding Denbury's failed plan for Elk Basin does not pertain to two other Montana projects -- Cedar Creek Anticline and Belle Creek -- while the company plans to divest itself of the Elk Basin property they are moving forward with the other two, with expectations of going into production as soon as they complete the construction of a pipeline, in early 2013.] By Evelyn Pyburn

Even though it hovers at the western edge of the Bakken, Baker, Montana is being focused upon as “the hub of the Williston Basin.” Baker is where oil companies are headquartering and where pipelines are intersecting.

What’s happening in the Bakken and the resurgence of eastern Montana oil fields dominated much of the discussion at the recent Montana Petroleum Association (MPA) Conference in Billings.

 

“The whole industry has sparked up,” said Dave Galt, MPA Executive Director, because of ever improving technology that allows more production from wells once considered depleted.

The industry is once again, “interested in investing in Montana,” said Galt, “Yet, it is also nervous, given our history and given what is going on nationally with the regulatory agencies.” This time the interest in Montana’s oil fields is concentrated in Roosevelt and Sheridan Counties, said Galt.

One exciting aspect of the business in Montana was the acquisition, earlier this year, of Encore Energy Partners GP, by Texas-based Denbury Resources Inc. with plans to develop a carbon dioxide-injection project at Elk Basin oil field on the Wyoming-Montana border (and at Belle Creek and Cedar Creek Anticline). Denbury is a major oil company noted for its use of this enhanced process for recovering oil, and Company President and COO Tracy Evans, was the keynote speaker at MPA’s Petroleum Industry Appreciation Day Luncheon. [Since his appearance, Denbury has announced that their plans have fallen through, due to a failure to reach an agreement with Encore Energy Partners LP. Denbury estimates probable and possible Elk Basin reserves recoverable via tertiary recovery at 37 million barrels of oil.]

Evans told luncheon attendees that the only reason that there aren’t more companies using carbon dioxide-injection to produce oil, is because there isn’t enough carbon dioxide. He said that there are 85 billion barrels of oil in the US that is recoverable using the process. The US could produce four times the amount of oil as a result of this one technology, he said. The potential for the use of carbon dioxide is so great and hence its prospective value is so great, that none of the cost of sequestering CO2 should be borne by the taxpayer, he said. “If it is used to produce oil it would help everyone’s economy,” he said.

It was representatives of pipeline companies who proclaimed Baker the hub of the Bakken. Tad True, Vice President of Bridger and Belle Fourche Pipeline, said “We believe Baker, Montana will become a hub for Bakken oil.” The company is building three collector pipelines bringing production from the north, west and east into Baker, to be downloaded on the main Butte Pipeline to be sent south. When completed the company’s transporting capacity will be increased from 120,000 barrels of oil a day to 300,000. Their goal, said True, is to move 300,000 barrels of oil a day into Baker, and 300,000 barrels a day out of Baker.

Paul Miller, Vice President of TransCanada Pipelines, agreed with True’s assessment about the significance of Baker. His company’s Keystone XL project’s access point is near Baker, he said.

Keystone XL is moving crude from the Canadian oil sands to the US refineries on the Gulf Coast. [See accompanying article on the Keystone project.]

Given the pipeline projects of his company and others, Miller said that “the Bakken will no longer be constrained.” That his company is running their pipeline through the Bakken on its way southward is no accident; “We have seen estimate that the Bakken production could reach as much as 500,000 to 700,000 barrels of oil a day,” said Miller. Greater access to pipelines increases the value of the oil and encourages future investments.

Montana’s oil industry is experiencing a resurgence because “Shale production of natural gas and oil has changed the whole dynamic of the industry over the last five years – of which the Bakken is an example,” said Ward Polzin, CFA, Managing Director of Tudor, Pickering, Holt & Co., a Houston-based energy private equity group that raises capital for energy groups.

Shale now dwarfs other types of resource in the US, said Polzin, and because of that the Bakken is seeing investors from France, Norway, the United Kingdom, Italy and lots of European companies. “We will see Asian investors next,” he predicted.

“A lot of people are investing in the Bakken because shale plays are for real and production lasts long term. The economies are very strong,” said Polzin.

The Gulf of Mexico, today, produces half of the natural gas it did ten years ago. It’s declining at about 30 percent a year. Little capital is being invested, there, said Polzin. “The economies are better in shale plays.”

Investors are pursuing joint venture agreements because they provide the needed capital and often bring with them needed expertise. Polzin said that “the smaller guys are doing deals with the larger companies.” The buyer is usually bigger than the seller.

“The Bakken is attracting private equity money and they are investing strongly with interest going across the spectrum, even though it’s not the easiest of times,” said Polzin.

The Bakken is one of the four large “shale plays” in the US. The others include Haynesville Shale in northwestern Louisiana, “which is expanding further into the southwest as technology improves.” Marcellus Shale has the “best rock,” stretching from New York through Pennsylvania. The Eagle Ford Shale is in South Texas – “it started with natural gas and is now expanding into oil.”

The Bakken, stretching from eastern Montana through much of North Dakota and into Canada, has the best rock quality. And as the technology has improved, allowing more extraction, producers are coming back to the fields in Montana which were previously considered exhausted and they are reviving them. Before, said Polzin, “there was an idea that the production from the Bakken was pretty much over in Montana.”

The technological improvements are allowing production from tighter rock, which is what is brining production back to Montana. “We will be adding new wells to the north to stem the decline,”

But in addition to the upbeat forecasts for the Bakken, there is the promise of the Three Forks Sanish, which is a formation beneath the Bakken. “It’s just as good as the Bakken, although not as extensive,” said Polzin. He noted, that for the Bakken to have a secondary zone like the Three Forks Sanish, is not unusual. The other three shale formations also have secondary zones.

The Three Forks Sanish is in the early stages of development and “is coming on a lot quicker,” said Polzin.

The amount shale investors pay for lease per acre depends on the level of risk involved and the degree to which it has already been developed. About $12,000 to $15,000 per acre is the best. The price is also impacted by access to market, and by the regulatory environment in which it lies.

The prevailing rate in the Bakken is hard to know said Polzin, because “not a lot of deals have been done.” Most of the mineral acres have been leased out to producers. In North Dakota it has generally ranged on the high end of about $7,000 to $8,000 What very limited examples there are in Montana have ranged from $500 to $1500.

When it comes to the degree of risk involved the Bakken is in the middle, according to Polzin. “We have a lot of wells but technology has changed so fast the existing wells really don’t reflect what they will look like in the future."

“It’s not that it hasn’t worked,” said Polzin, “but that we don’t know how good it can be.”

Polzin also noted that when the government takes public land out of production it impacts private holdings because there is an economies of scale at work in weighing the risks involved in investing. If an investor can’t follow where the oil goes then the cost of investing in a limited area is higher. The potential for the adjacent landowner is greatly diminished.

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